Oil and gas royalty firms consolidate Delaware Basin acreage, prices dip due to supply
A pair of oil and gas royalty firms merged to combine assets in the Delaware Basin of southeast New Mexico and West Texas, becoming the largest mineral royalty company in the region.
Kimmeridge Energy Management Company and Desert Royalty Company entered into definitive agreements to combine the assets, per a Thursday news release, creating a new company called Desert Peak Minerals.
The move consolidated more than 70,000 net royalty acres across eight counties in West Texas and southeast New Mexico, with day-one net production estimated at about 8,000 barrels of oil equivalent per day (boe/d).
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The merger also positioned Desert Peak as a “logical consolidator” of additional Delaware Basin assets, read the release, increasing exposure to leading oil and gas operators in the area.
Desert Peak Chief Operating Officer Chris Conoscenti said the company’s focus on the Delaware was intended to capitalize on growing production in the basin as more oil and gas deposits are discovered and extracted.
The U.S. Geological Survey reported in November 2018 the discovery of largest continuing oil and gas resource ever in the area, with 46.3 billion barrels of oil, 281 trillion cubic feet of natural gas, and 20 billion barrels of natural gas liquids in the Wolf camp Shale and Bone Spring Formation, in southeast New Mexico and West Texas.
“This is a transformational combination that will establish the industry's leading Delaware Basin-focused mineral and royalty company. Desert Peak will be optimally positioned to continue to grow organically and to expand its mineral and royalty ownership in the Delaware Basin,” Conoscenti said in a statement.
“As is widely recognized, the Delaware Basin is the leading oil and gas producing region in the United States, combining the best rates of return for operators, established and expanding takeaway infrastructure and oilfield services capacity, and a favorable regulatory environment."
Kyle Stallings, chief executive officer of Desert Royalty said the singular focus on the Delaware Basin was unique and would take advantage of the oil boom.
“The creation of a large mineral company with a singular focus on the Delaware Basin is the most interesting development I have observed in 33 years in the mineral business,” he said. “Desert Royalty is honored to have played a role in the conception of Desert Peak."
Managing Partner at Kimmeridge Ben Dell said the firm will continue to support Desert Peak as it grows in the Delaware and greater Permian Basin region.
“We are pleased to combine the high-quality assets of Kimmeridge with Desert Royalty to create the largest pure-play mineral and royalty company in the Delaware by net royalty acres,” he said.
“Against the backdrop of a challenging environment for (exploration and production), minerals provide a compelling mix of organic growth and free cash flow generation. Desert Peak will have our full support as they execute on their strategic growth plans."
Oil prices drop as supply exceeds demand
The price of domestic oil fell to about $55 per barrel as of Friday, down from a peak in early July of about $62 per barrel, per data from NASDAQ.
West Texas Intermediate (WTI) – a grade of oil used as pricing benchmark for domestic crude – started off the year trading about less than $45 per barrel, then peaked in May at about $66.
It then fell to about $52 per barrels in June, climbing to more just more than $60 last week before dropping by $5.
A report from the International Energy Agency (IEA) pointed to growth in oil supply exceeding demand by about .9 million barrels per day, and driving down the value of WTI.
“This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand growth started to falter,” read the report. “Clearly, market tightness is not an issue for the time being and any re-balancing seems to have moved further into the future.”
Even an agreement from the Organization of Petroleum Exporting Countries to extend supply cuts into March 2020 would likely have little effect on the price drop, read the report.
“The widely-anticipated decision by OPEC+ ministers to extend their output agreement to March 2020 provides guidance but it does not change the fundamental outlook of an oversupplied market,” the report read.
“Clearly, this presents a major challenge to those who have taken on the task of market management. The picture will evolve as 2019 progresses, but in the near term the main area of focus remains demand growth.”
And with tensions increasing in the Middle East, as an Iranian supply tanker was intercepted in the Mediterranean Sea by the United Kingdom, the reported predicted the high supply would continue to drop prices for the foreseeable future.
“Geopolitical tensions remain high in the Middle East Gulf and we recently saw the interception of an Iranian tanker in the Mediterranean,” the report read. “Even so, the oil price impact has been minimal with no real security of supply premium.”
More oil and gas news:
- BLM: Thousands of acres of New Mexico land leased to oil and gas companies
- BLM: Protest period opens for lease sale of New Mexico land to oil and gas industry
- Oil and gas pipelines in NM, Texas to solve Permian 'bottlenecks'
- More oil and gas disposal wells to address growing waste from Permian Basin boom
- Carlsbad, XTO agree on land purchase for regional headquarters
- Study: New Mexico loses on federal oil and gas leases, industry calls for quicker approvals
Adrian Hedden can be reached at 575-628-5516, email@example.com or @AdrianHedden on Twitter.